4 Economic Tools for Telecommunications Professionals The purpose of this chapter is to survey the primary economic tools destined to influence telecommunications market planning during the era of deregulation. We may generally divide the array of these ‘‘economic tools’’ into two categories: microeconomic and macroeconomic data analysis. Macroeconomic analysis relates the determinants of aggregate market demand to the business cycle. Microeconomic analysis involves the evaluation of supply and demand and market equilibrium, the computation of costs and profits, and estimation of economies of scale and projection of pricing. The principal concern of telecommunications firms during the early stage of deregulation will be pricing strategy aimed at establishing and expanding market share. We infer that the initial years of deregulation are likely to be turbulent based upon the pattern of historical experience seen in large industries previously deregulated. We also presume that a key dynamic in telecommunications deregulation will be the impetus to competition instigated by the computer industry. As one element of the telecommunications triad, the computer sector remains untouched by the specter of regulation; the economics of the industry may change as computers supplant traditional services offered by its broadcasting and telephony cousins. Innovations in this industry will fuel change in telephony and broadcasting in addition to new approaches to customer relations. The synergies of technological innovation and relaxed regulatory barriers preventing cross-ownership further reinforce the implicit uncertainties associated with identifying market winners and losers in the years ahead. Moreover, should the computer industry come to assume growing influence in such mat67
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ters as privacy, security, obscenity, and other noneconomic areas, the paradoxical prospect of gradual deregulation in telephony and broadcasting may be accompanied by government intrusiveness in the third sector. Such noneconomic contingencies may nevertheless have far-reaching economic consequences for the entire industry over the long run. Telecommunications professionals must therefore assert a collection of economic tools that benchmarks emerging competition with its consequent impact on future pricing. For purposes of this discussion, the application of economic tools is focused on telecommunications market planning. The use of microeconomic techniques to dissect market demand and provider response is emphasized in this presentation, although the costs of providing universal service and interconnection remain implicit and embedded in such a review [1]. Web site economic research tools on telecommunications infrastructure are provided in Appendix C. Of primary concern in this segment is the linkage between economic opportunities resulting from passage of the Act and the market research methodologies presented in Chapters 3 and 5 to 7. Those engaged in strategic planning, market forecasting, and sales management require a collection of tools that will enable them to seize upon opportunities evolving from competitive market interactions.
4.1 Overview of Macroeconomic Analysis 4.1.1 Macroeconomic Tools for Telecommunications Market Planning Although the primary focus of communications planners during deregulation will be the microeconomic analysis of veteran and emerging product lines, a note should be included here regarding the macroeconomic characteristics of the industry. The forecasting of broad long-term demand for all goods and services is tied directly to the course of employment, interest rates, and cyclical changes in the economy. With variance as to sector and composition of product line, the correlation of these factors varies from industry to industry [2]. In the case of the telecommunications industry, the influence of macroeconomic forces is manifested in the degree to which demand is dependent upon such factors as aggregate employment, income, and debt accumulation. We find in many communications products a relatively low correlation between these variables and resultant demand [3]. If we dichotomize veteran from emerging product lines, we note that the use of the telephone is largely impervious to cyclical variations in the economy. We verify this by evaluating market penetration rates. Stable rates—penetration rates that remain unaffected by transitions between prosperity and recession—suggest that these products and services remain ingrained fixtures.
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As time has passed, cable television subscription has come to resemble these same characteristics [4]. Rates of computer adoption for businesses and households imply the same phenomenon in recent years. The most profound post–World War II example of high, sustained rates of adoption seemingly unaffected by turns in the business cycle is television: in the nine recessions punctuating this era, television sales sustained a geometric rate of adoption independent of recession or inflation. A dramatic recent example of the same dynamic is reflected in the videocassette industry [5]. In each case, we note that nominal pricing, coupled with broad business and social acceptance, led to ubiquitous and habitual use. Telecommunications is thus differentiated from many other industries whose demand is connected directly to movements in the business cycle. The housing, steel, durable goods, and automobile industries all anticipate demand, in part, as a result of broader transitions in the economy. For veteran product lines, communications planners are concerned less with such empirical tests. It should be added, however, that to the extent that demand increases in these ‘‘cyclical’’ arenas, consumption may be expedited for communications services. The lasting empirical lesson from these data is clear and concrete: Given time, individuals and organizations come to rely on such products and services, unless alternative superior products are introduced. The introduction of new products and services, however, does bear a comparatively close relationship to shifts in the business cycle. When economic output grows rapidly, unemployment falls and real wages rise, and the number of new adopters increases proportionately. It is in this environment that new communication services are most effectively introduced to market. Conversely, market contractions or recessions diminish the number of ‘‘experimenters’’ inclined to purchase newly introduced services, particularly if they are exotic in nature. Marketers have long known this market characteristic and adjusted their presentation of new products accordingly. The two critical macroeconomic variables to examine in considering prospective demand for communications products and services are employment and income. The decision to purchase, and continue to use, communications services is chiefly a function of these variables. To this extent, the business cycle is an important tool in estimating long-term demand; if this method of analysis is applied, however, the length of current and future business cycles must be predicted. Generally, the lengths of prosperity have averaged four to five years; most recessions have averaged under one year [6]. However, the precise timing of recession and prosperity remains elusive, with recessions occurring in 1949, 1954, 1958, 1960, 1970, 1973–1974, 1980, 1981–1982, and 1990–1991. The cycles have thus been irregular and governed by a confluence of events often unanticipated or surprising. Nevertheless, once the transition from reces-
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sion to prosperity is clearly evidenced (see Figure 4.1), the impetus generated by lower unemployment and rising income is a significant aid to aggregate demand. Telecommunications planners, even if committed to long-term capital construction, cannot be completely oblivious to the dynamics of business cycle forecasting; the point in time at which a new product is introduced can be fortuitous or disastrous for a firm, especially during periods of accelerated competition.
4.1.2 Other Issues in Business Cycle Analysis One issue historically divides strategic planners in estimating aggregate demand for their products. This matter concerns the philosophy of adapting the business cycle as a macroeconomic tool to unfolding demand for new goods and services [7]. One philosophical view holds that national or regional demand for all services, telecommunications staples included, is a function of national income. In other words, if a forecaster anticipates rising national income, the presumption is that national aggregate demand will thereafter rise proportionPeak = Prosperity Trough = Recession* Growth
Output
Peak Growth
Trough
Peak Decline
Trough Secular growth trend
Growth Time
Figure 4.1 Transitions in the business cycle. Note that in the post–World War II era the average expansion has lasted approximately five years. The longest periods of expansion unpunctuated by recession are 1961–1970 and 1982–1990, which were marked by geometric growth in telecommunications infrastructure and services, as defined by convergence. The secular growth trend represents the average annual growth rate in the American economy (which has averaged between 3.0% and 3.5% since 1945). *Recession is defined as two or more consecutive quarters of negative growth in the Gross Domestic Product.
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ately. An alternative outlook contends that there exists a ‘‘family of business cycles,’’ in which one must select the appropriate cyclical model to predict probable demand industry by industry. This perspective divides cycles by unique characteristics or attributes and categorizes the following [8]: • Seasonal analysis, in which demand follows the contours (measured monthly or quarterly) of residential and business demand throughout the year; • Secular analysis, in which data is examined to elicit persistent underlying trends independent of national, regional, or other forces; • Three-cycle schema, in which three long-term forecasting waves are adjusted for 40 to 50 years (Kondratieff ), 40 months (Kitchin), or Juglar (dividing the Kondratieff wave in six increments). These cycles are superimposed over one another to illustrate emerging short-term developments. The last of these techniques has been accepted in many academic circles as appropriate business cycle theory; its credibility and application to telecommunications may be a matter of dispute or conjecture, but a macroeconomic grasp of long-term aggregate demand could facilitate capital construction decisions regarding infrastructure. As suggested in Chapter 7, the key to enhancing the probability of success in forecasting lies in applying all methods of analysis, and then searching for areas of common agreement based on intersecting inferences. Another issue of concern raised by analysis of the business cycle concerns the influence of psychology on consumption. As illustrated in Figure 4.1, incomes rise as the economy ascends to its peak. This ascendancy influences psychology—the attitudes, feelings, and confidence—of consumers and emboldens them to emulation or experimentation, depending on their position on the S-curve (discussed in Chapter 5). Significantly, data reveals that psychology plays a role in determining the timing of initial purchases (i.e., their first experience with a new communications product). Thus, the state of the business cycle at any moment indirectly influences the timing of such experimentation and can accelerate or decelerate consumption accordingly. This factor is of less concern to telecommunications providers—tied to long-term building commitments—but of keen value to content developers, who must consider such information when delivering new products. Psychology is profoundly difficult to quantify, though attempts have been numerous, and its value in illuminating consumer behavior in telecommunications remains unclear at present [9].
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4.2 Overview of Microeconomic Analysis 4.2.1 Microeconomic Tools for Telecommunications Market Planning Microeconomic tools are essential for communications market planners. The application of these techniques varies considerably in terms of infrastructure provision versus content development. While those firms engaged in the management of infrastructure—principally those involved in the telephony and cable television industries—must allocate large sums of capital over time to sustain a customer base, many content developers can readily shift product lines to accommodate changes in market preferences. To this extent, content developers extract competitive advantages vis-a`-vis their own competitors by exploiting network economies of scale and scope [10]. We noted in Chapter 2 that Sections 251 and 259 of the Act were written in such a way as to ensure that proliferating networks would become integrated through complete and fair interconnection at pricing designed to assure universality. The translation of this feature of the Act into practical economic terms has meant that many firms (e.g., Internet providers) currently assume a ‘‘quasi-free rider’’ position via deregulation. The following sections survey the fundamental techniques used to estimate supply and demand, costs and profits, equilibrium and elasticities, and the dynamics of pricing. While the application of these tools applies uniformly to both service providers and content developers, the costs uniquely borne by network managers differentiate their planning agenda from those of other telecommunications firms. 4.2.2 Principles of Telecommunications Supply and Demand A market consists of buyers and sellers. Resultant transactions are measured in price. Prices are defined by the interaction of supply and demand in markets. Some markets are local in nature, while others are regional, national, or international in scope. The geography of markets is an important characteristic in the evolution of telecommunications networks and the services they support. If the intent of the Act is to encourage competitive markets, then we would identify three important overlaying characteristics to market supply and demand. 1. The number of buyers and sellers would be such that no entity could independently influence levels of price. 2. Fluctuations in pricing levels would have to remain unimpeded by government sanction, regulation, or intervention of any kind.
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3. Movement of buyers and sellers would remain mobile over time (in other words, buyers would be free to select alternative providers at any given moment). Suppliers, too, would be free to move in and out of veteran and emerging product lines to secure their clientele. As noted in Chapter 3, there exists a spectrum of competition— gradations in the degree to which markets exhibit these characteristics. In perfectly competitive markets, optimal numbers of buyers and sellers moving in great mobility often produce substantial fluctuations in pricing. In any event, it is not government that influences the course of pricing over the long run. We have established that in the telecommunications triad of the telephony, broadcasting, and computer sectors there exists significant variation in competitive structure. While the computer industry remains fully unregulated, its counterparts are significantly regulated even after enactment of deregulation. Within telephony and broadcasting, some elements of the Act have modified or relaxed regulations (as elaborated in Chapter 2), but government influence over local telephony has remained entrenched. The commitment by federal and state governments to universal service has perpetuated an unfettered interference in market transactions. Whatever the underlying public interest spirit or motive, the fact remains that market supply and demand are influenced by government edict. We must therefore diagram intersecting supply and demand according to the type of market activity in which that enterprise is engaged. In areas denoted by competitive market transactions, as illustrated by the principles above, we diagram prevailing supply and demand as illustrated in Figure 4.2. We may refer to the setting of prices in such environments as ‘‘competitive market price determination’’ [11]. The interaction of supply and demand defines price, with supply and demand curves ever changing. Thus, price will ordinarily remain a constant if government asserts its regulatory powers to that end. Price stability, or predictability, will be sacrificed in the short run if deregulation is manifested in the way its sponsors intended, but greater congruence between market supply and demand will be attained in the long run. The effect of this congruence would, in theory, lead to equilibrium price, the state in which buyers want to buy the same quantity that sellers are prepared to sell. Therefore, if a seller sets a price higher than equilibrium, surpluses occur; if a seller sets a price too low, excess demand ensues and shortages inevitably follow. Surpluses, in short, beget subsequent declines in price. Shortages induce higher prices to the point of equilibrium. We may generally conclude that the standard application of supply and demand analysis is appropriate to pricing for content providers. Those communications firms that supply content for infrastructure—telephony, television,
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8 Excess supply
Price
6
{Surplus}
4
Equilibrium {Shortage}
2
Excess demand 5
10 Output
15
20
Figure 4.2 Dynamics of market supply and demand. Prices set above the equilibrium point generate surpluses, while prices set below precipitate shortages. Price reductions in the form of ‘‘sales’’ lower excess supply to the equilibrium point over time; price increases mitigate excessive demand until equilibrium is attained. Shifts in lines of supply and demand tend to be more dynamic in instances of excessive supply or demand, with competitors entering and leaving the marketplace at accelerated speed.
and computers—thrive, survive, or die by the prevailing dynamics of supply and demand. Those who manage, control, design, or create networking infrastructure operate, however, in a fundamentally different environment. Costs of generating content for infrastructure tend to be labor-intensive; costs of developing that infrastructure are capital-intensive and typically require a substantial time horizon to gain profitability. In short, the cost of labor is decisive in content development; the cost of capital is key in infrastructure development. Thus, economies of scope (cost savings through multifaceted service provision) coupled with economies of scale (the decline in per-unit costs as production rises) are essential for network managers. Reducing network costs per subscriber while exploiting profit potential from an expanding array of valueadded network services is critical to the emerging deregulated environment (see Figure 4.3). Large network providers obviously hold at least a short-term advantage during the early stages of deregulation. These firms are best able to exploit the fundamental principles of economies of scope and scale; they are best positioned financially (see Chapter 8), as a result, to engage in vertical integration by absorbing competitors [12]. Moreover, there exists an intrinsic comparative advantage for large network providers; the addition of each subscriber increases the value of the network for veteran users [13]. We thus note the economic formula for success in network provision: the exploitation of economies of
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Diseconomies of scale
Costs per unit
Economies of scale
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Long-run average cost curve
Phase 1
Phase 2
Phase 3
Quantity Figure 4.3 Hypothetical telecommunications services model: costs per subscriber. In the long run, the average cost curve for servicing telecommunications subscribers falls due to economies of scale; later, costs of servicing subscribers rise in response to diseconomies of scale (that is, as the firm expands, monitoring costs increase while costs of managing and sustaining employee productivity also rise). In response, the firm seeks to exploit economies of scope by designing a new product line and generating added revenue. This phenomenon takes hold in phase 3 of the long-run average cost curve.
scope and value combined with value-added multiple services. When these factors are juxtaposed to vigorous marketing, thus leading to expansive market share, a strategy is set in motion that relegates short-term pricing strategy to a secondary concern. What matters to network providers in the short term is market share and competitive threat; the law of supply and demand takes over in the long run to define market winners and losers. Despite the comparative advantage of size that some firms enjoy, the risks of committing long-term capital while network innovations advance rapidly are considerable. Closely allied to capital risk is the problem of user-churn, the frequency with which consumers move from provider to provider for their communication needs. With the prospect of proliferating competition, with new technologies supplanting veteran product lines, user-churn generates both threat and opportunity in the Act’s aftermath. The importance of user-churn as related to market share and strategic planning is discussed in Chapter 6, but one must simultaneously contemplate risks of capital and user-churn when projecting long-term plans. The need to satisfy consumers at their basic level of need has now assumed a significance never before entertained by common carriers. In the absence of predictable cash flow, it is not feasible to raise or borrow the capital required to build and maintain state-of-the-art infrastructure. It is for
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this reason that customer-led customization—one tool for satisfying the consumer’s basic communication requirements—is now regarded as a strategic priority in some telecommunications firms (see Chapter 10). 4.2.3 Price Elasticity of Demand in Telecommunications The measurement of changes in quantity demanded in relation to changes in price is called price elasticity. Simply, firms need to estimate how responsive consumers will be with respect to fluctuations in pricing. Elasticity is calculated by dividing the percentage change in quantity taken by the percentage change in price. In defining elasticities at various pricing points, a firm is able to compute gross revenues in relation to the number of units sold. Thus, analysis of elasticity serves two goals: (1) to gain a keener sense of the sensitivity of consumers to current and prospective changes in price and (2) to facilitate forecasting revenues in the face of competitive pressures in pricing. Figure 4.4 diagrams the relationship between price changes, demand elasticity, and total receipts. The calculation of elasticity will yield one of three results in each application: a value greater than 1, equal to 1, or less than 1. A value less than 1 indicates inelasticity, meaning demand is not responsive to changes in price. A value greater than 1 defines elasticity, suggesting that demand fluctuates with changes in price. Unitary elasticity occurs when the computation equals 1. If price elasticity of demand yields a value greater than 1, then a rise in price will generate less revenue. If the demand for a product is said to be inelastic, then an increase in price will produce more revenue. In situations where demand is unit elastic, the percentage change in quantity equals the percentage change in price. Obviously, there is spectrum of demand for communications products that is variously elastic or inelastic. Telephone service for most people is generally inelastic, since it is regarded as a staple of modern living. Cable television service has come to assume the same role for many Americans in recent years. For workers involved in occupations where mobility is crucial, cellular telephones are regarded as a necessity. On the other hand, interactive television service remains comparatively exotic, and thus pricing is highly elastic. The inelasticities associated with many staples represent potential opportunities for firms to increase prices. Yet, under conditions of emerging competition, the capacity of firms to raise prices while controlling market share is severely constrained. In part, unfolding inelasticities of demand for certain services inspired framers of the Act, who sought to mitigate higher prices that would accompany monopolistic or oligopolistic market structures.
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Figure 4.4 Price elasticity and total revenue. The illustrations indicate that as price is raised aggregate revenue expands by rectangle C and decreases by rectangle B under conditions of (a) unit elastic, (b) inelastic, and (c) elastic market environments.
4.2.4 Profit Maximization in Telecommunications A communications firm, like any enterprise, maximizes profit by increasing sales and minimizing cost. The difference between revenue and costs constitutes its profit. In competitive market structures, a firm would compute its marginal revenue and marginal costs and identify that level of output at which the two are equal. Marginal revenue is defined as the change in total revenue precipitated by a one-unit change in output level. Marginal cost, or incremental cost, represents the increase or decrease in total costs a firm bears resulting from the output of a unit more or less. Simply, prices are defined from the intersection of supply and demand, and the calculation of marginal costs and revenues identifies appropriate output levels. The extent to which a firm sells
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its outputs maximizes its revenue; the difference between revenue and costs thus determines profit. The measurement of profit is vital to evaluating a firm’s strategic vision. The computation of profit, the demonstration of profitability, is essential in conveying a firm’s credibility to stockholders and potential investors. We will note in Chapters 8 and 9 that profitability means ‘‘survivability’’ in the longterm murky waters of deregulation. The computation of profit margin provides communications firms with a valuable tool in justifying their strategies to potential investors. Profit margin is the ratio of income to sales and is measured in two formats. Gross profit margin is reflected by the percentage return that a company earns over the cost of goods or services sold; it is computed by dividing gross profit (sales minus costs of goods sold) by total sales. The gross profit a firm earns essentially covers operating expenses, including administrative expenses, taxes, and interest. Net profit margin, or return on sales, reflects the percentage of net income generated by each sales dollar. The standard computation of net profit margin results from dividing the income statement figure for net income after tax by total sales [14]. Both computations are illustrated in these expressions: Gross Profit Margin Gross Profit/Sales Net Profit Margin Net Income After Tax/Sales Both calculations provide investors and competitors with important clues about the value-added desirability of communications products. In an environment of rising competition, the firm that generates a product that provides value-added attributes is likely to generate a higher profit margin. In this sense, the determination of profit margins is significantly more important than gross profits. 4.2.5 Determinants of Supply and Demand Empirical evidence consistently pinpoints the following criteria as ‘‘determinants’’ or independent variables driving consumer and business demand for communications services. These include (1) income, (2) tastes and preferences, (3) prices of complementary and substitute goods, (4) future expectations regarding market prices, and (5) the number of buyers. These criteria, coupled with current market prices, determine aggregate demand for a product [15]. In the case of supply, the following criteria, apart from price, drive the supply providers are willing to introduce to market. These include (1) cost, (2) technology, (3) number of sellers, (4) prices of other products (or substitutes) that sellers could introduce, and (5) future expectations about market price.
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Methodologically, a firm would isolate each of these variables in relation to any given product and apply correlation analysis to determine the extent to which each is influential. A linear equation would then be designed to express the demand function appropriate to that product. From the point of providers, similar equations can be designed to estimate the supply generated by competitors and the resultant impact on pricing. Demand and supply functions are used in all industries and have gained renewed consideration in telecommunications following passage of the Act.
4.3 Telecommunications Demand and the Substitution Effect The degree to which consumers select from among alternatives to satisfy their communications needs may be described as the ‘‘substitution effect’’ [16]. The measurement and forecasting of dynamic substitution will grow in importance in the telecommunications industry as deregulation unfolds. Multiple factors define the dynamics of substitution, but we may generally conclude that the differentiation of elastic from inelastic preferences for segmented markets reveal much about the future of communications needs. Few will disagree that food and milk are, in principle, inelastic staples for most consumers. It is reasonable to conclude, also, that video cameras and vacations represent preferences best characterized as elastic in nature, with resultant wider price fluctuations. Consumers essentially do not reduce their consumption of necessities, regardless of changes in price. Price elasticity is substantially related to variation in income for luxury items. In the communications palate, the issue of substitution becomes a complex and nebulous one amid rapid technological change. The need of individuals and organizations to communicate rapidly has grown exponentially in recent years, but consumers will always search out lower cost alternatives—substitutes. How does one measure and project the course of substitution over time? Too many unknowns make such forecasting highly complex, but in differentiating each communications product or service, we may deduce the determinants of market demand as outlined in Table 4.1 [17]. In distinguishing ‘‘luxurious’’ from ‘‘necessary’’ communications services, there will exist substantial variation among income, occupational, and other stratified groups (although these differences are likely to diminish over time, for reasons outlined in Chapters 1 and 5). Where market demand is elastic, consumers will have multiple alternatives available; this might eventually mean, for instance, using Internet telephony as a substitute for local or long-distance
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Table 4.1 Determinants of Market Demand Elastic Market Demand
Inelastic Market Demand
Luxury
Necessity
Many substitutions available
Little or no substitutions available
Price represents large fraction of income
Price represents small fraction of income
Long-run time horizon
Short-run time horizon
telephone service. In markets characterized by a range of available substitutes, the price consumers bear tends to represent a higher fraction of income, particularly as they seek higher value-added services. The longer the time horizon, the greater the propensity toward elasticity; as time passes, new alternatives are introduced to market, and consumers are able to select the most desirable alternative. Consumers alter their tastes and preferences, as well, in response to emerging substitutes. The use of e-mail, for example, has diminished the need to communicate by letter [18]. It has been demonstrated, too, that longer versus shorter time horizons play a significant role in fulfilling the social benefits of elasticity and substitution. For example, in the short run only larger organizations could afford computers, fax machines, and related communications equipment. The long-run time horizon had the effect of reducing the cost of these items, which made them more readily available to first, small businesses, and later households. The dispersed benefits of these technologies cannot be measured exclusively in economic terms and have meant substantial improvement in the quality of life for many people [19]. The economics of ‘‘substitution’’ can be expressed through cross-price elasticity, or the degree of responsiveness of consumers to changes in price for a particular product relative to changes in price for available substitutes. For purposes of this measurement, available substitutes may be either identical or complementary in nature. As noted earlier in this chapter, it is obvious that technological innovation threatens veteran product lines; therefore, forecasting cross-price elasticities will assume a heightened priority for telecommunications firms in the future. There is expansive empirical evidence that consumers today explore the desirability of substitutes in a way that their predecessors did not. Therefore, it behooves the modern communications provider to maintain close scrutiny on those firms instigating such changes, especially in the area of computer innovations.
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4.4 Telecommunications Indifference Curves Deregulation, even if not fully realized in the manner anticipated by sponsors of the Act, is likely to have two primary effects on telecommunications supply: (1) there is likely to be a rapidly expanding, possibly explosive, growth in the number of veteran and emerging product lines, as technological innovation is substantially encouraged; and (2) there is likely to be added network capacity, anticipating growing consumption. The two forces are interactive and will instigate profound shifts in the scope of services available. Where a single cable television provider was formerly entrenched, the presence of DBS, MMDS, and cooperative community ventures will expand choice and diminish price. Where a single provider assumed control over local telephony, multiple providers may emerge, perhaps even from industries historically unrelated to telecommunications (e.g., electric utilities). Where television content had been presided over by broadcasting networks, cable television, computer, and other concerns may intervene to provide alternative programming. In these instances and other prospective cases, consumers may experience astonishing choices previously unimagined. As consumers brace for choice and newly formed substitutions, indifference curves will inevitably become an important tool for communications firms. Both content and infrastructure providers will seek out the benefits of measuring the extent to which consumers satisfy their communications needs by choosing from among proliferating choices. The indifference curve measures bundled choices from among alternatives to satisfy needs and desires. In other words, for each dollar a consumer commits to satisfying basic communications needs (see Figure 4.5), how will he or she allocate that sum for telephony, television, and other services? Consumers may opt for a simple bundle of telephony and television service, or shift to the Internet for delivery of all services, or select a single provider that can supply a menu of options unique to his tastes. The dynamic interaction of the determinants of supply, as outlined, guarantees no simple answer as to the extent to which consumers will augment or simply substitute their preferences for communications. The problem is a profoundly complex one when innovations are introduced so readily to market. As cellular phones, Internet service, interactive television, and other services augment veteran product lines, how will the consumer reallocate his communications budget? Or, is it conceivable that the need and desire for information management and transmission are so ravenous that today’s emerging services will become tomorrow’s staples? A general response to these questions cannot be formulated, but the measurement of reallocated communications budgets can be diagrammed through the use of
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Figure 4.5 Hypothetical indifference curve, which measures the hypothetical combinations of alternative services that satisfy one’s telecommunications requirements. An implicit question posed by the curve concerns whether consumer demand for communications services will continue to rise or remain relatively constant, compelling different choices along the indifference curve.
indifference curves; a firm would design indifference curves for each targeted market segment. Indifference curves gain a renewed importance in this industry as deregulation is implemented.
4.5 A Comment on Economic Tools for Telecommunications Limitations of space herein prevent a fuller treatment of the economic tools that are appropriate to evaluating and predicting the course of the telecommunications industry during deregulation. Appendix C lists a full array of resources, including Web sites, that will permit the reader to track the corporate applications of these tools. Seminal research in the field is now under way, precipitated by the enactment of deregulation, and organizations such as the International Communications Forecasting Conference sponsor innovative microeconomic forecasting methods [20]. It can be stressed, despite the uncertainties and constraints of price measurement and prediction, that an appropriate complement of economic tools for communications managers and planners would include [21]:
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1. Business cycle analysis, with special emphasis on the relationship between the business cycle and consequent national income and its relationship to communications consumption; 2. Supply and demand analysis, with emphasis on the design of demand functions appropriate to market segments; 3. Computation of market price equilibrium points; 4. Application of substitution analysis; 5. Calculation of elasticities, particularly with respect to emerging product lines. Particularly in the case of firms that previously operated in monopoly markets, a fresh perspective on equipping managers and strategic planners with these skills would greatly improve organizational communication and camaraderie. The need to sensitize all members of the firm to the economic realities of deregulation has asserted itself. There is now a manifest requirement to convert the esoteric jargon of economics into a common organizational language.
References [1] See Heldman, Peter, Robert Heldman, and Thomas Bystrzycki, Competitive Telecommunications: How to Thrive Under the Telecom Act, New York: McGraw-Hill Co., 1997. [2] Valentine, Lloyd, and Dennis Ellis, Business Cycles and Forecasting, eighth edition, Cincinnati, OH: Southwestern Press, 1991, pp. 130–168. [3] See Gasman, Lawrence, Telecompetition: The Free Market Road to the Information Highway, Washington, D.C.: Cato Institute, 1994. [4] Belisle, Patti, ‘‘Cable Television,’’ Communication Technology Update, Boston, MA: Focal Press, 1996, pp. 35–45. [5] Brown, Dan, ‘‘A Statistical Update of Selected American Communications Media,’’ Communication Technology Update, Boston, MA: Focal Press, 1996, p. 350. [6] Valentine and Ellis, op. cit., pp. 59–105. [7] Case, Karl, and Ray C. Fair, Principles of Economics, Englewood Cliffs, NJ: Prentice-Hall Inc., 1992, pp. 586–629. [8] Valentine and Ellis, op. cit., pp. 106–128. [9] Whiteley, Richard, and Diane Hessan, Customer Centered Growth, Reading, MA: AddisonWesley Press, 1996, pp. 146–190. [10] Egan, Bruce, Information Superhighways Revisited: The Economics of Multimedia, Norwood, MA: Artech House, 1996, pp. 166–168.
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[11] Colander, David, Economics, Chicago, IL: Irwin Press, 1995, pp. 548–568. [12] Dolan, Edwin, and David Lindsey, Microeconomics, Chicago, IL: Dryden Press, 1992, pp. 420–423. [13] Egan, op. cit., pp. 166–167. [14] Argenti, Paul, The Portable MBA Desk Reference, New York: John Wiley & Sons, 1994, pp. 321–322. [15] Frank, Robert, Microeconomics and Behavior, New York: McGraw-Hill Inc., 1991, pp. 134–158. [16] Colander, op. cit., pp. 502–506. [17] Frank, op. cit. [18] See Tansimore, Rod, ‘‘In Its Image,’’ Telephony, April 21, 1997, pp. 64–70; and Ernst, Daniel, ‘‘Consumer Services,’’ Tele.com, Nov. 15, 1996, pp. 57–62. [19] See Strassman, Paul, Information Payoff: The Transformation of Work in the Electronic Age, New York: The Free Press, 1985, for a discussion of social (and quality-of-life) benefits arising from integrated use of information and communication technologies. [20] Consult Web site references listed under the University of Michigan (see Appendix C) to identify institute resources committed to price and market share forecasting. [21] See Hawkins, D. I., Roger Best, and Kenneth Coney, Consumer Behavior: Implications for Marketing Strategy, Homewood, IL: Irwin Press, 1996, Section Four, for a discussion of the integration of microeconomic techniques into marketing and strategic planning.
